Resolved CMBS Dwarfed By Special Servicing Pipeline, Fitch Says

Though commercial mortgage-backed securities (CMBS) special servicers are making some progress in working out distressed loans, they still have a sizable backlog awaiting them, according to Fitch Ratings.

Last year, servicers resolved approximately $8.7 billion in CMBS loans, which Fitch notes represents only 11% of the amount in special servicing at the end of last year.

While CMBS servicers resolved over 50% more loans in 2009 compared to 2008, the percentage of the loans resolved in special servicing has declined from 31% to 11% due to the substantial increase into special servicing. The overall average recoveries of 87% – a decrease from 2008 – can directly be attributed to the increase of distressed assets, continued lack of liquidity and declining property values, Fitch says.

Seventy-five percent of the specially serviced loans were modified and sent back to the master servicer either modified and are now performing or paid-in-full with almost no losses. However, it remains to be seen whether these modifications will prevent a return to special servicing, Petosa adds.

"The health of the property, the borrower and the credit markets will dictate how successful the remedies are at keeping loans out of special servicing," she says.

The balance of specially serviced CMBS loans increased to $74 billion by the end of last year from a trough of $4.4 billion at year-end 2007. Servicers continue to face an uphill battle, Fitch says, with over half (52%) of the unpaid principal balance of specially serviced CMBS transferred due to imminent default.